Оглавление
Robert F. Bruner. Applied Mergers and Acquisitions
Table of Contents
List of Tables
List of Illustrations
Guide
Pages
Applied Mergers and Acquisitions
About the Author
Foreword
NOTES
Preface
ACKNOWLEDGMENTS
NOTES
CHAPTER 1 Introduction and Executive Summary. AN URGENT PROBLEM: HOW CAN MY TEAM DO BETTER THAN THE AVERAGES?
OVERVIEW OF A FRAMEWORK FOR M&A SUCCESS
SEVEN DISRUPTIVE IDEAS WORTHY OF BEST PRACTITIONERS
CONCLUSION
NOTES
CHAPTER 2 Ethics in M&A. INTRODUCTION
WHY SHOULD ONE CARE?
Sustainability
Trust
Team Building
Higher Standard
Reputation and Conscience
IN WHOSE INTERESTS ARE YOU WORKING?
WHAT IS “GOOD”? CONSEQUENCES, DUTIES, VIRTUES
“Right” and “Wrong” Defined by Consequences
“Right” and “Wrong” Defined by Duty or Intentions
“Right” and “Wrong” Defined by Virtues
PROMOTING ETHICAL BEHAVIOR
Adopt a Code of Ethics
Talk about Ethics within Your Team and Firm
Find and Reflect on Your Dilemmas
Act on Your Reflections
MINI-CASE: GREENMAIL PAYMENT BY WALT DISNEY PRODUCTIONS, 1984
Assessment of the Problem
Origins of the Problem
Duties of Disney’s CEO and Board
Consequences
Possible Engagement with the Other Side
Long-Term Validity of the Action
Alternatives
Public Reaction
Conclusion
Outcome
CONCLUSION
NOTES
CHAPTER 3 Does M&A Pay? INTRODUCTION
MEASUREMENT OF M&A PROFITABILITY: BETTER THAN WHAT?
FINDINGS BASED ON THE ANALYSIS OF MARKET-BASED RETURNS TO SHAREHOLDERS
Returns to Target Firms
Returns to Buyer Firms
Returns to Buyer and Target Firms Combined
FINDINGS BASED ON THE ANALYSIS OF REPORTED FINANCIAL PERFORMANCE
FINDINGS ABOUT THE DRIVERS OF PROFITABILITY
FINDINGS FROM SURVEYS OF EXECUTIVES
FINDINGS FROM CLINICAL STUDIES
CONCLUSIONS OF REVIEWERS THROUGH TIME
VIEWING THE WHOLE MOSAIC: SOME CONCLUSIONS
SPECIAL NOTE
NOTES
CHAPTER 4 M&A Activity. INTRODUCTION
M&A ACTIVITY APPEARS IN WAVES
Wave 1: 1895–1904
Wave 2: 1925–1929
Wave 3: 1965–1970
Wave 4a: 1981–1987
Wave 4b: 1992–2000
EXPLANATIONS OF M&A ACTIVITY
Hubris
Market Manias
Overvaluation of Stocks and the Asymmetry of Information
Agency Costs and the Correction of Governance Problems
Monopoly, Competitive Positioning, and “Rent-Seeking” Behavior
Industry Shocks
Summary Overview of the Drivers of M&A Activity
“CREATIVE DESTRUCTION” AS THE DRIVER OF M&A ACTIVITY
IMPLEMENTING THE “CREATIVE DESTRUCTION” VIEW: LISTEN TO MARKETS AND FIRMS
What to Look For: The Many Forms of Economic Turbulence
Where to Look for Turbulence
CONCLUSION
APPENDIX 4.1 How to Listen to Customers of Firms
APPENDIX 4.2 How to Listen to Macroeconomic and Sector Conditions
APPENDIX 4.3 Listening for Turbulence as Communicated through Capital Markets
DEBT MARKETS
EQUITY MARKETS
Multiples
Betas
Charting and Measures of Market Sentiment
DERIVATIVES MARKETS
APPENDIX 4.4 Listening to Firms and Their Industries
NOTES
CHAPTER 5 Cross-Border M&A. INTRODUCTION
CROSS-BORDER M&A ACTIVITY
M&A ACTIVITY WITHIN REGIONS AND TRADING BLOCS
DRIVERS OF CROSS-BORDER M&A
Exploit Market Imperfections
Extend the Reach of the Buyer’s or Target’s Intangible Assets
Reduce Tax Expense through Arbitrage across Different Tax Jurisdictions
Reduce Risk through Diversification
Exploit Differences in Capital Market and Currency Conditions
Improve Governance
Other Drivers of M&A Activity
RETURNS FROM CROSS-BORDER M&A
STRATEGIC ANALYSIS OF COUNTRIES: GETTING A VIEW
Macroeconomic View
Microeconomic View
Institutional View
Cultural View
SUMMARY AND IMPLICATIONS FOR THE PRACTITIONER
NOTES
CHAPTER 6 Strategy and the Uses of M&A to Grow or Restructure the Firm. INTRODUCTION
SETTING STRATEGY
Mission, Objectives, and Strategy
Planning Strategy Starts with SWOT
Assessing Competitive Position
Business Definitions Are Key
Classic Successful Strategies
EXPANSION BY INORGANIC GROWTH
Motives for Inorganic Growth
Transactions for Inorganic Growth
Research Findings about Joint Ventures, Alliances, and Minority Equity Investments
RESTRUCTURING, REDEPLOYMENT, AND SALE
Motives
Transactions to Restructure, Redeploy, or Sell
Research on the Profitability of Unit Divestitures, Asset Sales, and Liquidation
Research on the Profitability of Carve-outs, Spin-offs, Split-offs, and Tracking Stock
FRAMEWORK FOR CHOOSING A PATH FOR INORGANIC GROWTH
FRAMEWORK FOR CHOOSING A PATH FOR RESTRUCTURING
DOES IT PAY TO DIVERSIFY OR FOCUS THE FIRM?
Value Drivers in Diversification and Focus
Summary of Research Findings
Practical Implications of the Research Debate over Diversification versus Focus
CONCLUSIONS
APPENDIX 6.1 A Critical Look at the Self-Sustainable Rate of Growth Concept and Formulas
BEGINNINGS: A FOCUS ON VALUE
THE POPULAR MODEL FOR ASSET GROWTH
INSIGHTS TO BE GAINED FROM THE POPULAR ASSET GROWTH MODEL. Comparisons across Firms
Analysis of Policies within a Firm
SOME CAVEATS ABOUT THE POPULAR SELF-SUSTAINABLE GROWTH MODEL OF ASSETS
NOTES
CHAPTER 7 Acquisition Search and Deal Origination: Some Guiding Principles. INTRODUCTION
SOME PRINCIPLES OF ACQUISITION SEARCH
The Currency of Acquisition Search Is Information
Clarity, Privacy, and Cost: What the Market Knows Clearly Is Fully Priced
Information Arrives Sequentially and Must Be Filtered
Invest in Social Networks: They Make Search More Efficient and Effective
The Best Information Is Firsthand
Navigators Affect Dissemination and Search: Gatekeepers and River Guides
Organize Consistently with the Search Environment
Persistence and Repeated Effort Pay
CASE STUDY: KESTREL VENTURES LLC
Acquisition Guidelines
Company Screening Criteria
SUMMARY
NOTES
CHAPTER 8 Due Diligence. INTRODUCTION
THE CONCEPT OF DUE DILIGENCE
DUE DILIGENCE PRINCIPLES AND STRATEGIES
Conclusion: Broad Is Good
PROCESS: TIMING, TEAM, AND OUTPUTS
Timing Influences on the Due Diligence Process
Due Diligence Team
Outputs
TARGET’S VIEW: PRESSURE AND THE DATA ROOM
WHAT TO LOOK FOR: FOCUS ON KNOWLEDGE
Legal Issues
Accounting Issues
Tax Issues
Information Technology
Risk and Insurance Issues
Environmental Issues
Market Presence and Sales Issues
Operations
Real and Personal Property Issues
Intellectual and Intangible Assets
Finance
Cross-Border Issues
Organization and Human Resources
Culture
Ethics
SOURCING INFORMATION
EXCELLENCE IN DUE DILIGENCE
APPENDIX 8.1 Comprehensive Overview of Due Diligence: Knowledge, Information, Data
LEGAL ISSUES. Knowledge
Information
Data
ACCOUNTING ISSUES. Knowledge
Information
Data
TAX ISSUES. Knowledge
Information
Data
INFORMATION TECHNOLOGY ISSUES. Knowledge
Information
Data
RISK MANAGEMENT ISSUES. Knowledge
Information
Data
ENVIRONMENTAL ISSUES. Knowledge
Information
Data
MARKET PRESENCE AND SALES ISSUES. Knowledge
Information
Data
OPERATIONS ISSUES. Knowledge
Information
Data
REAL AND PERSONAL PROPERTY ISSUES. Knowledge
Information
Data
INTELLECTUAL AND INTANGIBLE ASSETS ISSUES. Knowledge
Information
Data
FINANCE ISSUES. Knowledge
Information
Data
CROSS-BORDER ISSUES. Knowledge
Information
Data
ORGANIZATION AND HUMAN RESOURCES ISSUES. Knowledge
Information
Data
CULTURE ISSUES. Knowledge
Information
Data
ETHICS ISSUES. Knowledge
Information
Data
NOTES
CHAPTER 9 Valuing Firms. INTRODUCTION
RULE #1: THINK LIKE AN INVESTOR
Look to the Future, Not the Past
Focus on Economic Reality
Get Paid for the Risks You Take
Value Creation: Time Is Money
Remember “Opportunity Cost”
Information Is the Core Source of Advantage in Identifying Value-Creating Investments
Diversification Is Good
RULE #2: INTRINSIC VALUE IS UNOBSERVABLE; WE CAN ONLY ESTIMATE IT
RULE #3: AN OPPORTUNITY TO CREATE VALUE EXISTS WHERE PRICE AND INTRINSIC VALUE DIFFER
RULE #4: SO MANY ESTIMATORS, SO LITTLE TIME— IT HELPS TO HAVE A VIEW
Estimates Based on Accounting Book Value
Liquidation Value of the Target Firm
Replacement Cost Valuation
Current Trading Value or Market Value
Trading Multiples of Peer Firms
Transaction Multiples for Peer Firms
Discounted Cash Flow Values
Valuation by Another DCF Method, Adjusted Present Value
Venture Capital/Private Equity Approach
Option Valuation Approach
RULE #5: EXERCISE ESTIMATORS OF INTRINSIC VALUE TO FIND KEY VALUE DRIVERS AND BETS
RULE #6: THINK CRITICALLY; TRIANGULATE CAREFULLY
Scrutinize Estimators
Scrutinize Data
Scrutinize the Spreadsheet Model
Scrutinize Sensitivity Assumptions
Eliminate Estimates in Which You Have Little Confidence
Compare the Finalist Estimates of Value
Choose
RULE #7: FOCUS ON PROCESS, NOT PRODUCT
RULE #8: WHEN IN DOUBT, SEE RULE #1
VALUATION CASE: CHRYSLER CORPORATION, MARCH 1998
Think Like an Investor
Estimate Values
DISCOUNTED CASH FLOW VALUATION
Triangulate toward a Negotiation Range
APPENDIX 9.1. Value Merge.xls: When and How to Use the Model. WHEN TO USE THE MODEL
GOOD PRACTICE: EXERCISING THE MODEL
LAYOUT AND CONTENTS
MODELING RULES
NOTES
CHAPTER 10 Valuing Options. OVERVIEW
OPTION BASICS
Some Terminology
Options Are Pervasive
Four Simple Option Positions
Identifying and Mapping a Firm’s Hidden Options
Caveats about the Option Pricing Approach
OPTION PRICING THEORY. The Drivers of an Option’s Value
SPREAD BETWEEN MARKET PRICE OF UNDERLYING ASSET AND EXERCISE PRICE OF OPTION
Payoff Structure of Options
Payoff Structure of Combining Positions
Put-Call Parity
Value of Options at Times Other Than Maturity
How Volatility Affects Option Values
Valuation of Call Options: The Black-Scholes Model
OPTION APPLICATIONS
Valuing Equity
Valuing Bonds
Valuing Loan Guarantees
Valuing Subordinated Debt
Valuing Equity-Linked Debt
Designing Securities
Assessing Capital Investments
A PRACTICAL GUIDE TO VALUING FINANCIAL OPTIONS
Finding Parameters
How to Compute Put Option Values
Some Caveats
CONCLUSION: FIVE GENERAL LESSONS FOR THE M&A DEAL DESIGNER
NOTES
CHAPTER 11 Valuing Synergies. THE CONCEPT OF SYNERGY WHEN ONE THINKS LIKE AN INVESTOR
SYNERGY ESTIMATES MUST BE A CENTRAL FOCUS OF M&A ANALYSIS
A FRAMEWORK FOR SYNERGY ANALYSIS
Synergies from Assets or Activities That Are In Place
Real Option Synergies
ESTIMATING SYNERGY VALUE, WITH EXAMPLES
Crucial Foundation: Establish Credibility of the Synergy Source
Everything after Tax
Choose a Discount Rate Consistent with the Risk of the Synergy
Reflect Inflation, Real Growth, and a Reasonable Life
Use a Terminal Value to Reflect Extended Life of Synergies
Be Flexible: X(A + B) = XA + XB
Example: Valuing Cost Saving and Asset Reduction Synergies
Example: Valuing Revenue Enhancement Synergies
Example: Valuing Financial Synergies
Example: Valuing Real Option Synergies
Example: Backsolving for the Required Synergies from the Acquisition Premium
SYNERGIES IN THE DAIMLER/CHRYSLER MERGER
RULES OF THUMB
CONCLUSION: OBJECTIVITY ABOVE ALL ELSE
NOTES
CHAPTER 12 Valuing the Firm across Borders. INTRODUCTION
HOW BORDERS AFFECT M&A VALUATION
Inflation
Foreign Currency Exchange Rates
Tax Rates
Timing of Remittance of Cash
Accounting Principles
Political Risk
Segmented Markets
Rule of Law, Corruption, Corporate Governance, and Protection of Minority Shareholders
Social Issues and Culture
STRATEGY FOR DCF APPROACH: HOME VERSUS FOREIGN VALUATION
ADJUSTING CASH FLOWS
Need for Internal Consistency
Valuing Real versus Nominal Cash Flows
Translating Foreign Currency Cash Flows into Home Currency
ESTIMATING THE DISCOUNT RATE FOR FOREIGN CASH FLOWS
Some Basic Principles
An Overview of Cost of Equity Models for Cross-Border Investing
Multifactor Model
Credit Model
Capital Asset Pricing Model (CAPM) and Its Variants
How Much Difference Does the Choice of Model Make? Why?
RECAPITULATION: VALUATION PROCESS WITH ADJUSTED CAPM
VALUATION CASES ACROSS BORDERS. Example: Westmoreland Energy Inc., Power Project at Zhangzhe, China30
Example: Continental Cablevision’s Investment in Fintelco31
SUMMARY
NOTES
CHAPTER 13 Valuing the Highly Levered Firm, Assessing the Highly Levered Transaction. INTRODUCTION
THE WORLD OF HIGHLY LEVERED FIRMS. Forms of Highly Levered Transactions
LBO Activity
Effects of LBOs
EFFECT OF LEVERAGE ON VALUE OF THE FIRM
“WHOLE DEAL” APPROACH TO EVALUATING THE HIGHLY LEVERED FIRM AND TRANSACTION
Step 1: Is the Purchase Price for the Target Appropriate?
Step 2: What Are the Sources of Positive Net Present Value?
Step 3: Can the Firm Sustain the Debt It Will Assume?
Step 4: What Are the Prospective Returns to the Various Providers of Funds in This Deal?
A LEVERAGED RECAPITALIZATION: KOPPERS COMPANY
A LEVERAGED BUYOUT: MEDIMEDIA INTERNATIONAL, LTD
Equity Holder’s Perspective: Residual Cash Flow Valuation Approach
Sources of Positive Net Present Value
Banker’s Perspective
Mezzanine Investors’ Perspective
“Whole Deal” Summary
A LEVERAGED BUYOUT: REVCO DRUG STORES
Assessment of Probability of Default
Some Insights about Debt Capacity
SUMMARY
NOTES
CHAPTER 14 Real Options and Their Impact on M&A. INTRODUCTION
Some Generic Types of Real Options
Entry or Growth Options
Exit or Abandonment Options
Timing Options: Rights to Delay or Accelerate
Switching Options
WHERE REAL OPTIONS APPEAR IN M&A
Strategy
Deal Design
Postmerger Integration
IF OPTIONALITY IS SO PERVASIVE, WHY NOT VALUE EVERYTHING AS AN OPTION?
HOW TO ASSESS THE IMPACT OF REAL OPTIONS
Find and Specify the Option
Model and Value the Option
Interpret the Results and Develop Implications
FOUR MINI-CASES IN THE ANALYSIS OF REAL OPTIONS
Spin-off Value of Lucent: Assessing Latent Optionality
Agouron Pharmaceuticals: Valuing the Pure Research Firm
NCNB’s Acquisition of First Republic: Valuing the Impact of Staged Investment
EM.TV’s Partial Acquisition of SLEC: The Long Call and Short Put
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 15 Valuing Liquidity and Control. INTRODUCTION
ADJUSTING VALUES FOR DISCOUNTS AND PREMIUMS
Discounts and Premiums Start from a Base
The Multiplicative Model—the Traditional Approach
Example of the Traditional Approach: Three Prospective Acquisitions
WHERE DO ILLIQUIDITY DISCOUNTS COME FROM? LIQUIDITY IS AN OPTION
Liquidity Defined
Empirical Research on Illiquidity Discounts
The Concept of Liquidity as an Option
WHERE DO CONTROL PREMIUMS COME FROM? CONTROL IS AN OPTION
Control and Control Premium
Control Right Is Derived from Relative Power
Potential Private Benefits May Drive the Value of Control
Strategic Flexibility May Drive the Value of Control
Empirical Findings on the Value of Control
INTERACTION OF LIQUIDITY AND CONTROL
MINI-CASE: ATTEMPTED ACQUISITION OF VOLVO BY RENAULT, 1993
CONCLUSION
NOTES
CHAPTER 16 Financial Accounting for Mergers and Acquisitions. INTRODUCTION
OVERVIEW OF PURCHASE ACCOUNTING
Financial Accounting Standards 141 and 142
Illustration of Basic Purchase Accounting: Acquisition of 100 Percent of the Target
Acquisition of Less Than 100 Percent of the Target Firm
HOW TO INTERPRET REPORTED FINANCIAL RESULTS IN AN M&A TRANSACTION
Accounting Dilution and Accretion
Other Measures of Financial Performance Related to Financial Statements
An Illustrative Example
Practical Insights about Accounting Dilution
LINKAGE AMONG ACCOUNTING CHOICES, FORM OF PAYMENT, FINANCING, AND PRICE
DANGERS OF EARNINGS MANAGEMENT
Types of Earnings Management
Research on Earnings Management
Financial Fraud: Mini-Case on WorldCom Inc
Sarbanes-Oxley Act
SUMMARY AND CONCLUSIONS
APPENDIX 16.1. Mechanics of Pooling-of-Interests Accounting
NOTES
CHAPTER 17 Momentum Acquisition Strategies: An Illustration of Why Value Creation Is the Best Financial Criterion. INTRODUCTION: FOUR CAUTIONARY TALES
“Automatic” Sprinkler1
Ling-Temco-Vought
U.S. Office Products
Tyco International, Ltd
MOMENTUM ACQUISITION STRATEGIES
EPS Momentum
Revenue Momentum
ARGUMENTS FOR AND AGAINST MOMENTUM ACQUIRING
Evidence That Momentum-Investing Strategies Are Not Superior
Momentum Is Unsustainable Indefinitely
Momentum Invites a Focus on Accounting Cosmetics Rather Than Economic Reality
Momentum Strategies Can Promote Uneconomic Deals and Reject Good Ones
VALUE CREATION IS THE BEST CRITERION FOR EVALUATING ACQUISITION STRATEGIES
CONCLUSION: MOMENTUM STRATEGIES VERSUS VALUE STRATEGIES
APPENDIX 17.1. An Analytic Model of EPS Dilution
NOTES
CHAPTER 18 An Introduction to Deal Design in M&A
INTRODUCTION
DEAL STRUCTURES ARE SOLUTIONS TO ECONOMIC PROBLEMS
POSSIBLE DESIRABLES IN DESIGNING A DEAL
THE DESIGN OF TERMS CAN HELP ACHIEVE OBJECTIVES
EACH DEAL IS A SYSTEM: THE “WHOLE DEAL” PERSPECTIVE
SOME IMPLICATIONS FOR THE DEAL DESIGNER
There Is No Single Best Feasible Deal
Trade-offs Are Driven by Constraints and Dominance
Deal Design Is a Learning Process
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 19 Choosing the Form of Acquisitive Reorganization. INTRODUCTION: FIVE KEY CONCERNS FOR THE DEAL DESIGNER
THE FORM OF REORGANIZATION HAS IMPORTANT IMPLICATIONS
Internal Revenue Code Creates Choices
How to Choose?
DEALS THAT ARE IMMEDIATELY TAXABLE TO THE SELLING SHAREHOLDERS
Purchase of Assets, Substantially Using Cash or Debt Securities
Purchase of Stock, Substantially Using Cash or Debt Securities
Triangular Cash Mergers
DEALS THAT DEFER TAX TO THE SELLING SHAREHOLDERS
Statutory Merger or Consolidation (“A” Type Reorganization)
Forward Triangular Merger (“A” Type Reorganization)
Reverse Triangular Merger (“A” Type Reorganization)
Voting Stock-for-Stock Acquisition (“B” Type Reorganization)
Voting Stock-for-Assets Acquisition (“C” Type Reorganization)
SUMMARY AND IMPLICATIONS FOR THE DEAL DESIGNER AND SENIOR EXECUTIVE
NOTES
CHAPTER 20 Choosing the Form of Payment and Financing. INTRODUCTION
PATTERNS AND TRENDS IN FORM OF PAYMENT
DOES FORM OF PAYMENT MATTER?
CONSIDERATIONS IN SELECTING THE FORM OF PAYMENT
Different Perspectives
Possibility of Competing Bidders
Taxes
Control
Reported Financial Results
Financing
Transaction Costs
Size, Both Absolute and Relative
Asymmetric Information
ASSESSING THE FINANCING ASPECTS OF A DEAL
Seven Dimensions of M&A Transaction Financing
Key Perspectives for Analysis of the Financing Choice
A Summary Framework: FRICTO
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 21 Framework for Structuring the Terms of Exchange: Finding the “Win-Win” Deal. INTRODUCTION
A MODEL FOR CRITICALLY ASSESSING EXCHANGE RATIOS
USES OF THESE MODELS
AN ILLUSTRATION
EXTENSION TO CASH-FOR-STOCK DEALS
CHOOSING EXCHANGE RATIO TARGETS IN THE WIN-WIN ZONE
SUMMARY AND IMPLICATIONS OF THE EXCHANGE RATIO FRAMEWORK
APPENDIX 21.1. Derivation of the Exchange Rate Determination Model Based on the Price-Earnings Ratio Regarding Share-for-Share Exchanges (Larson-Gonedes Model)2. BUYER’S MAXIMUM ACCEPTABLE EXCHANGE RATIO (P/E MODEL)
TARGET’S MINIMUM ACCEPTABLE EXCHANGE RATIO (P/E MODEL)
APPENDIX 21.2. Derivation of the Exchange Rate Model Based on Discounted Cash Flow Regarding Share-for-Share Exchanges. BUYER’S MAXIMUM ACCEPTABLE EXCHANGE RATIO (DCF MODEL)
TARGET’S MINIMUM ACCEPTABLE EXCHANGE RATIO
APPENDIX 21.3. Derivation of the Exchange Rate Determination Model Based on the Price/Earnings Ratio Regarding Cash-for-Share Exchanges. BUYER’S MAXIMUM ACCEPTABLE EXCHANGE RATIO (P/E MODEL)
TARGET’S MINIMUM ACCEPTABLE EXCHANGE RATIO (P/E MODEL)
APPENDIX 21.4. Derivation of the Exchange Rate Model Based on Discounted Cash Flow Regarding Cash-for-Share Exchanges. BUYER’S MAXIMUM ACCEPTABLE EXCHANGE RATIO (DCF MODEL)
TARGET’S MINIMUM ACCEPTABLE EXCHANGE RATIO
APPENDIX 21.5. Derivation of Equation (3) Exchange Ratio Consistent with Buyer’s Percentage Contribution to Newco
NOTES
CHAPTER 22 Structuring and Valuing Contingent Payments in M&A. OVERVIEW AND SUMMARY
CONTINGENT PAYMENTS IN M&A
EARNOUTS CAN BE USEFUL; BUT IF SO, WHY AREN’T THEY UBIQUITOUS?
Potential Benefits of Using Earnouts
Potential Disadvantages of Earnouts
EARNOUTS ARE OPTIONS ON FUTURE PERFORMANCE
STRUCTURING AN EARNOUT
Earnout Amount
Earnout Period
Performance Goals
Payment Schedule
Operational Integration
Accounting Rules and Performance Measurement
Additional Issues
TAX AND ACCOUNTING CONSIDERATIONS
Tax Implications of Earnout Structures
Financial Accounting
GENERIC APPROACH TO VALUING EARNOUT INSTRUMENTS
Valuing an Earnout with Monte Carlo Simulation
Valuation Results of the Hypothetical Example
CASE EXAMPLE: ELI LILLY’S CONTINGENT PAYMENT UNITS
The Challenge of Differing Outlooks and Its Solution
Valuation of the Contingent Payment Units
Epilogue
CONCLUSION: PROPOSING AND NEGOTIATING EARNOUTS AND OTHER CONTINGENT PAYMENTS
NOTES
CHAPTER 23 Risk Management in M&A. INTRODUCTION AND SUMMARY
VALUE AT RISK WHEN A DEAL FAILS
TRANSACTION RISK: TYPES AND SOURCES
Decline in Buyer’s Share Price or Financial Performance
Preemption by Competing Bidder
Disappointed Sellers
Appearance of Formerly Hidden Product Liabilities
Loss of Key Customers by the Target
Problems in Target’s Accounting Statements
Regulatory Intervention
Litigation by Competitors
Disagreements over Social Issues
Failure to Get Shareholder Approvals
Controversy or Lack of Credibility
TYPES OF RISK MANAGEMENT
Before the Public Announcement of the Deal
Between Announcement and Consummation
After Consummation
TYPES OF COLLARS AND THEIR ANALYSIS
Four Classic Profiles
Valuing a Collar: The Case of AT&T/MediaOne
CONTINGENT VALUE RIGHTS: RHÔNE-POULENC’S ACQUISITION OF RORER
STAGED ACQUIRING: THE CASE OF GENZYME’S INVESTMENT IN GELTEX37
CONCLUSION: WHERE AND WHEN TO MANAGE RISK
NOTES
CHAPTER 24 Social Issues. INTRODUCTION: THE IMPORTANCE OF SOCIAL ISSUES IN M&A
SURVEY OF SOCIAL ISSUES FREQUENTLY ADDRESSED IN MERGER NEGOTIATIONS
Management Team of Newco: Who Stays, Who Leaves
Retention Payments: Terms of Compensation for Continuing Managers
Severance Payments: Terms for Departing Managers
Leadership Succession
Organization Design of Newco
Board Composition and Control Options
Structure of Transaction: “Merger of Equals”
Corporate Name of Newco
Headquarters Location
Other
IMPACT OF SOCIAL ISSUES ON ATTRACTIVENESS OF THE DEAL
Avenues of Economic Impact
Who Pays for Social Terms? The Matter of Trade-Offs
CASE STUDIES IN THE ROLE OF SOCIAL ISSUES
Daimler and Chrysler: Cross-Border Merger of Equals
First Union and Wachovia versus SunTrust
Hewlett-Packard and Compaq: Retention Bonuses and CEO Compensation
Fleet Financial Group and BankBoston
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 25 How a Negotiated Deal Takes Shape. INTRODUCTION
OVERVIEW OF THE DEAL SHAPING PROCESS
RISKS TO THE DEAL: HOW THE PROCESS CAN GET DERAILED
TRANSACTION PLANNING AND PREPARATION
INITIATING DISCUSSIONS: GAINING AN EARLY SENSE OF THE POSSIBILITIES
FIRST-ROUND DOCUMENTS: TERM SHEET, LETTER OF INTENT, AGREEMENTS ABOUT CONFIDENTIALITY, STANDSTILL, AND ENGAGEMENT OF ADVISERS
THE DEFINITIVE AGREEMENT
DISCLOSURE TO INVESTORS AND REGULATORS
GAINING APPROVAL FOR THE DEAL
CASE STUDY: DAIMLER-BENZ AND CHRYSLER
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 26 Governance in M&A: The Board of Directors and Shareholder Voting. INTRODUCTION
GOVERNING WELL IS HARD TO DO
GOOD GOVERNANCE PAYS
HOW SHAREHOLDERS RULE
Foundational Documents for Shareholder Rule
Votes per Share
Proxies
Supermajority Provisions
Cumulative Voting for Directors
Shareholder Influence through Litigation
Shareholder Influence through Jawboning
FIDUCIARY DUTIES OF TARGET DIRECTORS IN CONSIDERING M&A
First Standard of Review: Business Judgment Rule
Second Standard of Review: Enhanced Scrutiny
Third Standard of Review: Entire Fairness
PRACTICAL IMPLICATIONS: PREPARING FOR THE BOARD’S REVIEW OF A DEAL
CODA: HOW CAN FIRMS BE GOVERNED BETTER?
NOTES
CHAPTER 27 Rules of the Road: Securities Law, Issuance Process, Disclosure, and Insider Trading. INTRODUCTION
OVERVIEW OF KEY SECURITIES LAWS AND RULES IN THE UNITED STATES
Securities Act of 1933
Securities Exchange Act of 1934
Williams Amendment to the Securities Exchange Act of 1934
Exceptions for Private Placements
State Securities and Takeover Regulations
International Comparison of Securities Law and M&A
KEY IMPLICATION: DISCLOSURE
Forward-Looking Statements
Caution
Manage Leaks of Information
KEY IMPLICATION: INSIDER TRADING
Classical Theory of Insider Trading Liability
Misappropriation Theory of Insider Trading Liability
Mini-Case: McDermott and Gannon
KEY IMPLICATION: OBSERVANCE OF PROCESS
Due Process
No Gun Jumping
Bespeak Caution
Say It Plainly; Make No Omissions
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 28 Rules of the Road: Antitrust Law. INTRODUCTION
ANTITRUST LAW: HISTORY AND MOTIVES
OVERVIEW OF ANTITRUST REGULATORS AND LAWS AFFECTING MERGERS AND ACQUISITIONS
Sherman Act of 1890
Clayton Act of 1914
Hart-Scott-Rodino Antitrust Improvements Act of 1976
United States Antitrust Merger Guidelines
Horizontal mergers
Nonhorizontal Mergers: Vertical and Conglomerate
U.S. PREMERGER REVIEW PROCESS: HART-SCOTT-RODINO AND EXON-FLORIO. Hart-Scott-Rodino Filing Process
Exon-Florio: Acquisitions by Foreigners Affecting National Defense
ANTITRUST REGULATION OF M&A IN THE EUROPEAN UNION
Dimensions of Enforcement
Mini-Case: General Electric/Honeywell and the European Commission’s Perspective
Mini-Case: General Electric/Honeywell, DOJ’s Perspective
CRITICAL PERSPECTIVES ON ANTITRUST POLICY
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 29 Documenting the M&A Deal. INTRODUCTION
FIRST-ROUND DOCUMENTS
DEFINITIVE AGREEMENT
MERGER PROXY STATEMENT AND PROSPECTUS
CONCLUSION
CHAPTER 30 Negotiating the Deal. INTRODUCTION
THE RELEVANCE OF NEGOTIATION PROCESS
BEHAVIORAL FINANCE
INFLUENCING BARGAINING OUTCOMES: AN OVERVIEW OF THE CHALLENGE
Uncertainty
Conversion of Multiple Dimensions into a Deal
PRACTICAL ADVICE: HOW TO PREPARE FOR A NEGOTIATION
Assess Buyer and Target Strategy
Value the Target
Explore Your Best Alternative to a Negotiated Agreement (BATNA)
Determine Asking Price and Reservation Price
Identify Relevant Players and Their Interests
Anticipate Trade-Offs
Consider Motivations and Aspirations
Role-Play
Determine Bargaining Costs
Check Your Counterparty Reputation
Reflect on Persuasion
MANAGE THE NEGOTIATION PROCESS PROACTIVELY
Conduct Multi-Issue, Parallel Bargaining, Not Single-Issue, Serial Bargaining
Distinguish Claiming Value from Creating Value
Look for Trade-Offs
Consider Openness
Don’t Let Stalemates Simmer
Master the Tactics
Time Matters
Turn Negotiation into a Corporate Capability
Bridge a Gap
Culture Counts
Manage the Politics within Your Own Team
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 31 Auctions in M&A. INTRODUCTION
AUCTION STRUCTURES AND MOTIVES
The Auction in the Spectrum of Asset Sales
How Negotiations and Auctions Compare
Types of Auctions
ADVANTAGES AND DISADVANTAGES OF AUCTIONS
AUCTIONS IN PRACTICE: THE CASE OF RJR NABISCO
THE “WINNER’S CURSE” IN M&A: IS IT REAL?
SOME PRACTICAL ADVICE TO SELLERS IN AUCTIONS
SUMMARY AND CONCLUSIONS
NOTES
CHAPTER 32 Hostile Takeovers: Preparing a Bid in Light of Competition and Arbitrage. INTRODUCTION: TAKEOVERS ARE GAMES
Profile of the Target of a Hostile Bid
A PROFILE OF HOSTILE TAKEOVERS
Uncertain Outcomes
Attractive Returns
Bargaining Tactic
BE AWARE OF THE PLAYERS, BOTH ON THE FIELD AND OFF
THE ARB IS THE CONSUMMATE ECONOMIC ACTOR
INTERPRETING ARBITRAGE SPREADS
THE ARB ASSESSES A RECAPITALIZATION PROPOSAL IN TERMS OF BLENDED VALUE
GOVERNMENT CONSTRAINTS ON THE GAME
SELLING SHAREHOLDERS FACE A PRISONER’S DILEMMA
TO SET A BID PRICE: THINK LIKE AN INVESTOR
CONCLUSION: THE GAME HAS IMPLICATIONS FOR DESIGN AND DEFENSE OF TAKEOVERS
NOTES
CHAPTER 33 Takeover Attack and Defense. INTRODUCTION
PREVALENCE AND DISSUASIVE INFLUENCE OF ANTITAKEOVER DEFENSES
INVESTOR REACTION TO ANNOUNCEMENTS OF ANTITAKEOVER DEFENSES
ECONOMIC EFFECTS OF ATTACK AND DEFENSE
TACTICS OF TAKEOVER ATTACK
TACTICS OF TAKEOVER DEFENSE
Proactive Defenses: Charter Amendments, Golden Parachutes, Poison Pills
Embedded Defenses
Reactive Defenses
Combinations of Defenses
SUMMARY AND IMPLICATIONS FOR THE PRACTITIONER
NOTES
CHAPTER 34 The Leveraged Restructuring as a Takeover Defense: The Case of American Standard. INTRODUCTION
THE AMERICAN STANDARD CASE
The Target
The Situation
The Bidder
THE RESPONSE
Stage One: The Reaction
Stage Two: The Poison Pill
Stage Three: Revisions and New Steps
Stage Four: Increasing the Leveraged Recapitalization
Stage Five: Court Rulings and the LBO
PARACHUTES, PILLS, AND LITIGATION
The Parachute
The Poison Pill
Summary
RESTRUCTURING DEFENSES: MANAGEMENT BUYOUT AND LEVERAGED RECAPITALIZATION
Management Buyouts and Leveraged Recaps
Wealth Effects of Leveraged Restructurings
WHEN DOES A RESTRUCTURING DEFENSE MAKE SENSE?
CONCLUSION
SPECIAL NOTE
NOTES
CHAPTER 35 Communicating the Deal: Gaining Mandates, Approvals, and Support. INTRODUCTION
CHALLENGES AND GUIDING PRINCIPLES FOR COMMUNICATING THE DEAL
Conflicting Aims
The Reality of the Transaction May Hinge on One’s Perspective
The Need to Balance Secrecy and Disclosure
The Constraints of “Bandwidth”
The Need to Balance Objectivity and Advocacy
The Opportunity to Manage Expectations of Stakeholders
PRESENTING THE “CONCEPT PROPOSAL” TO SENIOR MANAGEMENT OF THE BUYER (INTERNAL ONLY)
COMMUNICATING THE DEAL TO A BOARD OF DIRECTORS
ANNOUNCING THE DEAL TO THE PUBLIC
COMMUNICATING WITH EMPLOYEES
CONCLUSION
NOTES
CHAPTER 36 Framework for Postmerger Integration. INTRODUCTION
INTEGRATION STRATEGY
Autonomy: Culture, Leadership, and Decision Making
Interdependence: Business Processes and Value Chain
Control: Finance, Quality, and Reporting
FRAMEWORK FOR INTEGRATION STRATEGY
Integration Strategies in Banking
Integration Strategies in Conglomerate Firms
IMPLEMENTATION OF INTEGRATION STRATEGY
Integration Planning
Integration Execution
INTEGRATION STRATEGY MINI-CASE: THE MERGER OF UNION BANK OF SWITZERLAND AND SWISS BANK CORPORATION, 1998
Merger Motives and Integration Strategy
Implementation of the Integration Strategy
Execution of Postmerger Integration in Consumer and Corporate Banking (Private and Corporate Clients Division)
Execution of Postmerger Integration in the Investment Banking Division
CONCLUSION: INTEGRATION IS TRANSFORMATION
NOTES
CHAPTER 37 Corporate Development as a Strategic Capability: The Approach of GE Power Systems. INTRODUCTION
BUSINESS DEVELOPMENT AT GE POWER SYSTEMS
DEAL PROCESS AT GE POWER SYSTEMS
Setting Strategy for M&A: Goals and Criteria
Deal Development
Postmerger Integration
Postaudit
Mini-Case: The Acquisition of Alpha Company
THE M&A “FACTORY”: OPERATIONALIZING BUSINESS DEVELOPMENT
IMPLICATIONS FOR BEST PRACTICE
NOTES
CHAPTER 38 M&A “Best Practices”: Some Lessons and Next Steps. INTRODUCTION
SOME ELEMENTS OF M&A BEST PRACTICE
WHERE THE SIDEWALK ENDS
Yes, M&A Pays, But …
Focus Is Good, But …
Cycles Happen
What You Don’t Know Can Hurt You
Negotiators Trade Off
Earnings Get Managed
Good Governance Pays. But What Is Good Governance?
Getting Defensive
How Much Regulation Is Appropriate?
“What Is the Cost of Capital?”
DEVELOPING BEST PRACTITIONERS
THE END OF IT ALL
NOTES
About the CD-ROM. INTRODUCTION
DESCRIPTION OF GENERIC TEMPLATES
MINIMUM SYSTEM REQUIREMENTS
USING THE CD WITH WINDOWS
TROUBLESHOOTING
References and Suggestions for Further Reading
Index
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